Citibank continues experiments with derivatives

by Brian Johnson on March 1, 2010

cdsIn a recent Market Watch article, David Weidner commented that Citibank is attempting to create a new product, the CLX, which acts as insurance against financial collapse.  The product sounds, as Weidner deftly points out, a lot like the Credit Default Swaps that helped cause our current recession.  It involves the same risks and is being endorsed using the same shaky justifications.

The problem with financial products like the CDS or the CLX is, first and foremost, that it is unclear who covers the ‘bet.’ If financial collapse does happen, and Citibank is to make good on their CLXs, what guarantee is there that Citibank will be in a position, post-collapse, to honor its obligations?  And if it isn’t in a position to honor those obligations, who does?  What’s clear after the fallout of the CDS scandal is that the responsibility of paying off the debts of ‘too big to fail’ financial institutions inevitably falls on the American tax payer.

New Credit Card Law Creates Better Monthly Statements

by Odysseas Papadimitriou on February 25, 2010

Recently I received a brochure from Capital One’s credit card division that summarizes the changes made on their monthly statements, as a result of the new credit card regulations. All credit card issuers have made similar changes, therefore I thought that a visual representation of the “new credit card statements” would be helpful in showing everyone what to expect.

There are 5 types of changes:

No New Jobs from the Job Bill

by Odysseas Papadimitriou on February 24, 2010

no-jobsThe current Job Bill being debated on Capitol Hill, in its most recent form, holds at its core an incentive to hire people who have gone more than sixty days without a job.  Businesses that hire these workers are allowed to forgo paying their social security taxes throughout 2010.  The extent of this benefit depends both on the employee’s rate of pay and on the length of their employment.  The hope is that this will provide employers incentives to create new jobs.

Whether the bill passes or not, it’s unlikely to do much by way of solving the unemployment problem in this country because it’s built upon a faulty premise: that the reason employers aren’t hiring is because they can’t afford to pay social security taxes—which only amounts to about 6.2% of the employees paycheck.  The truth is that employers hire people because they need the help.  If there is no demand for their products, then they certainly don’t need more people to help them manage their dwindling operations.  To put it plainly, an incentive of 6.2% simply doesn’t address the problem of dried up demand.

Take Full Advantage of the New Credit Card Rules

by Odysseas Papadimitriou on February 23, 2010

Credit Card WalletAs you might have heard, the new credit card law (i.e. the Card ACT) went into effect yesterday. The provisions of the new law that will impact most of us are the ones around interest rates, overlimit fees, payment allocation, and monthly statements.

Here is a quick summary of what you should know so that you can take full advantage of these pro-consumer changes:

Nobel Economist Predicts Further Collapse

by Brian Johnson on February 18, 2010

Nobel Prize-winning economist and Columbia Business School professor, Joseph Stiglitz argues in this interview that we are headed for another collapse.  His arguments are sound and should be listened to.

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Save Money by Understanding the Economics of Bottled Water

by Lynn B. Johnson on February 12, 2010

save-money-on-waterBack in August of 2009, Yian Mui of the Washington Post reported that “sales of bottled water have fallen for the first time in at least five years.” Its meteoric rise to popularity was astonishing: sales of bottled water “swelled 59 percent to $5.1 billion between 2003 to 2008, making it one of the fastest growing beverages.”

So, economically, if you owned shares in a company that sold bottled water, you probably received a tidy return on your investment.

Citi Offers High Yields to No-Risk Customers

by Lynn B. Johnson on February 8, 2010

citi-secured-credit-cardI pay my bills on time, have a cushion in my savings account, and don’t spend-and-burn. I’ve also worked with Card Hub since the beginning of time. So, I can honestly tell you I know that secured credit cards can be a super way to build or repair your credit history, and that I never imagined having one in my wallet, given that I have excellent credit.

This goes to show that one should never say “never.” Citibank has a cute little offer going, one that rewards account holders with a 4.07% annual rate of return, and rewards itself with a new base of no-risk credit card holders.

Bonuses: Not all Banks are the Same

by Odysseas Papadimitriou on February 3, 2010

BonusesIt is frustrating that American banks, post bailout, are paying out record bonuses given that many of those banks would not be in business if they hadn’t received a handout at the tax payers’ expense.  In response, President Obama is now threatening to heavily tax these bonuses to send the banking industry the message that the American people will not stand for such behavior.  The depiction of these banks in the media and by the government, however, is far too simplified.  Not all banks are the same.  Some banks simply didn’t need the bailout and other banks received aid indirectly when the government bailed out their debtors.

For a company like AIG, the issue is quite clear.  They would have failed had we not bailed them out.  As a result, we now own most of their company.  AIG clearly shouldn’t give their executives a bonus.  Moreover, as shareholders, we have every right to demand that those executives don’t get a bonus.  On the other hand, some banks didn’t need a bailout.  Capital One, for instance, was forced to take the government’s money so as to help stabilize the economic disaster.  Their cooperation helped conceal the real problem areas (i.e. Citibank and Bank of America), thus preventing investors from cutting and running on companies that desperately required the bailout to stay afloat.  Those banks which didn’t need the bailout repaid that money almost immediately and they shouldn’t be penalized.  If anything, they should be rewarded for helping the American economy stay afloat and for having a sustainable business model when, all around them, other giants of their industry were toppling.

Anti-Scam Advice from the ConsumerMan

by Lynn B. Johnson on February 2, 2010

scamI had a fascinating conversation with Mr. Herb Weisbaum, AKA the ConsumerMan, about the scams we should all be aware of. It was an eye-opening conversation, one that I hope will save you a lot of pain and anguish.

Surprisingly, your credit card account is not on the scammers’ most-wanted list. “Con artists are trying not to use credit cards [in their scams] because the charges can be reversed,” Weisbaum said.

Shopping without Guilt... with Gilt!

by Lynn B. Johnson on January 25, 2010

giltI don’t remember how I first heard of Gilt Group, but its sales model intrigued me: Luxury branded items for sale at deep discounts, but only for a limited time. I received an invitation (yes, you need an invitation to join) on my birthday. I needed new shoes. I signed up.

Gilt’s sales begin at noon EST daily and run for no more than 36 hours. They send a daily email to members — I usually get mine at 11:57 — announcing the brands and items for sale that day. In the few weeks I’ve been a member, they’ve offered goods from Vera Wang Collection, Judith Lieber, Rodanthe, American Apparel (really?), Marc by Marc Jacobs, and Alexander Wang.

We Are All Doing More With Less - Except for our Goverment

by Odysseas Papadimitriou on January 23, 2010

wasteful-spendingMore and more American families these days are learning to live within their means.  They’re making trade offs about what they want, what they need, and what they can afford.  They’re trying, during these hard times, to make their dollar stretch as far as possible.  You’ll notice that what they aren’t doing, or at least not in great multitudes, is borrowing against their future so as to maintain their lifestyles.  Sure, the draw to live as one has become accustomed is strong, and likewise, the ability to buy on credit is still a possibility.  Were there no repercussions, were it simply a case of someone saying, “here take this, no strings attached,” we wouldn’t need to make sacrifices so that we can live within our means.  However, when we know that there will be repercussions for our spending, that the credit card bill will come or that the bank will want their money back, we also know that we are going to have to do more with less.

Note, this is not a post about family budgets, but a post about national budgets.  America, like America’s households, needs to learn to get more done on less money.  Just as with those households, it is easy for the country to buy on credit, on the assumption that we can repay at some later date… far too easy in fact.  Very little will stand in the way of our nation going deeper into debt, but just as with a normal household, someone has to eventually pay the bill.  That money is not given to us—it comes with repercussions.  Our President seems to be operating in the same mode as his predecessor:  putting our nation into deeper and deeper debt so as to pay for all the projects that he wants to start or maintain.  Congress raised the federal deficit cap in February of 09, they raised it again this month, and are poised to raise it again next month as part of a larger economic bill, currently before the Senate.  Simply raising the amount of debt the federal government allows itself to accrue is easy enough to do.

Corporate Democracy

by Odysseas Papadimitriou on January 21, 2010

dictatorIn an article printed in The New York Times last November, Andrew Ross Sorkin addressed the issue of corporate governance by exploring the proposed takeover of the British confectioner’s company Cadbury by the American company Kraft.  The article explains that because British Boards of Directors act, essentially, in an advisory capacity, the decision to sell the company is based on the shareholder’s desires.

Since the article was written the takeover of Cadbury by Kraft has been complicated by various developments, but the issues discussed by Sorkin still hold.  Sorkin used the proposed takeover as an opportunity to discuss the differences between the power of corporate governance in England and in America.  In the British system, shareholders have much more control over the future of their investments, while in the American system, much of the control of the company is ceded to a Board of Directors and so takeovers, like that of Cadbury by Kraft, generally require the Board’s blessing to move ahead.

Business As Usual For Congress

by Brian Johnson on January 20, 2010

CongressOn January 14th, Congress voted to increase the federal deficit cap to $12.4 trillion having  raised it from $12.1 trillion February of last year.  The bill was a concession by Democrats who had planned an attempt to increase the federal deficit cap by $2 trillion in order to prevent having to call another vote before next year’s midterm elections.  Already, Democrats are pushing to increase the deficit cap again by mid-February to prevent the U.S. government from spending more than it is allowed and therefore default on certain obligations.  Because the government tax revenues simply cannot cover the rate of government spending, both the national debt and the interest on that debt continue to grow.  For most Americans, this is cause for concern.

Not for Congress though.  The increase to the deficit cap follows on the heels of  last year’s huge omnibus spending bill signed into law on December 16, 2009 which earmarked $446.8 billion for special projects and increased federal spending by 10 to 12%.  Its the kind of thing that can only make it into legislation in December when lawmakers are in rush to make it to the holiday recess and haven’t had the time to give proper vetting to the measures on the table.  It was a holiday surprise for the average tax-payer and a gift to the numerous special interest groups that, sadly, have influence on our lawmakers.  We may recall that it was just such an omnibus spending bill that legalized Credit Default Swaps.  In 2009, despite the fact that the federal government had reached the limit of money that it could borrow, the omnibus spending bill wrapped together 6 different lesser spending bills and had provisions for over 6,000 back home projects for the lawmakers who sponsored it.

The Economics of Obesity

by Lynn B. Johnson on January 19, 2010

dollar-weightIs your fat costing you money? Suze Orman thinks so. On this season of NBC’s “The Biggest Loser” weight-loss competition reality show, Orman quizzed the participants. Turns out that yes, an unhealthy waistline can contribute to poor fiscal health. This is bad news for the 34% of Americans who are obese.

Obese employees earn less money than their co-workers: Research shows that an obese worker earns $7,000 less than fellow employees. Orman attributes this in part to more sick days taken by obese people. Additionally, workers with above-normal body weight have an increased risk of short-term disability: from 7.3% for normal-weight workers to 14.9% for obese workers.

Britain's Checks Go Paperless...America to Follow

by Brian Johnson on January 18, 2010

paper-checksThe board of the UK Payments Council, a body composed of England’s top banks, has voted to phase out paper checks by 2018.  With the rise of electronic bill pay, the old tried and true method of paying by check is becoming, not only obsolete, but also expensive.  According to a Reuter’s report, it costs nearly a British pound (roughly $2) to process a check.

We ought to see this as a sign of things to come for the U.S. as well.  Our banks and economy, similar to Britain’s, are moving towards greater streamlining through electronic payments.  People demand the speed and efficiency of electronic and on-line banking.  The paper check has already become obsolete for many purchases (on-line shopping, for instance), and retailers are increasingly refusing to accept personal checks as a means of payment.  Many retailers see checks as an unnecessary invitation to fraud.  Others see it as an unnecessary complication in payment processing relative to the debit card efficiency and speed.

To Foreclose or Not To Foreclose

by Odysseas Papadimitriou on January 13, 2010

foreclosureA recent article in the San Francisco Chronicle offered an interesting opinion by Brent T. White, a law professor at the University of Arizona.  He advises homeowners to allow their home’s to go into foreclosure when they find that their home is worth less than what they owe on their home loan.  His argument is that foreclosure is a smarter economic decision and that it is only the social stigma of losing one’s home that is keeping homeowner’s paying their bills when it would be in their best interest to cut their losses and run.

I agree with White that there are times when it is in a homeowner’s best interest to simply walk away from their loan.  However, I also feel that he grossly misrepresents the repercussions of a foreclosure. White’s suggestion completely downplays that, in most cases, creditors can still legally pursue you.  He also suggests that one’s credit score after going into foreclosure is likely to recover in two years.  The truth, however, is that you will have bad credit for the next 5 to 7 years, which means limited access to credit and increased costs on anything that relies on your credit history (e.g. renting an apartment).  Finally, White’s suggestions ignores the human cost of this stressful process.  Going through foreclosure creates a great deal of anxiety.  It is not something you can simply do without feeling the effect on your own well being.

The Mortgage Relief Plan is a Failure

by Brian Johnson on January 12, 2010

failureOur government suffers from a naivete with some of its plans to resuscitate the economy which consumers simply cannot afford.  To be more specific, the current administration needs to come to terms with the fact that business practices are dictated by laws and potential for profit.  Businesses cannot, and should not, be counted on to change their policies out of the goodness of their hearts.

Last March, the Obama administration put into place its Mortgage Relief Plan to help homeowners stay out of foreclosure by urging banks to institute loan modifications for borrowers.  Renegotiation of their loans would allow borrowers to make payments on a more affordable rate, allowing them, in theory, to keep homes that would otherwise go into foreclosure.  Since its launch last March, the plan has provided permanent loan modifications to only 4% of those who have attempted to sign up.  Lenders like Bank of America have helped only .06% of the people who’ve requested a modification.

Medicare Explained

by Brian Johnson on January 8, 2010

medicareFrom time to time, we are sent relevant information from other sources hoping to use Wallet Blog as a way of getting important information out there to American consumers.  We were sent this explanation of Medicare benefits by David Colgren, the media relations counsel to CalCPA and thought it might be of interest to our readers. Here is his explanation:

Step 1. Understand how Medicare works.
Medicare is a federal program that provides health insurance to retired individuals, regardless of their medical condition. Here are some basic facts about Medicare that you should know.

A New Credit Card Scam

by Lynn B. Johnson on January 5, 2010

credit-card-scamHere’s a new credit card scam for you. Cleverly enough, it convinces its victims to call a voicemail system and input the access data for their credit cards.

Victims in Kent County, MI reported receiving cell-phone texts and recorded calls that said that one of their credit cards had been deactivated. They were directed to please call  (616) 855-1134 to set everything right again.

The 'Shining Virtue' of 2009?

by Lynn B. Johnson on January 3, 2010

2009It’s almost to the point that I don’t want to read the Business section anymore. Are you with me? And cognizant as I am that “if it bleeds, it leads,” it’s time for a feel-good financial-services story. So I emailed Liz Pulliam Weston, nationally syndicated personal-finance writer and author of many books, to “get her thoughts on the best and worst financial products and services of 2009.”

Tell you what: the woman’s smart with a capital MART, but I was surprised by her answer.

Wallet Blog's Top 10

by Odysseas Papadimitriou on December 28, 2009

wallet-blog-top-10We’re coming up on the close of the year, so we thought we ought to take stock of some of the ideas we’ve put forward that we think are central to our commentary on the world of finance. Since starting Wallet Blog, we’ve found that our mission to provide information on the nation’s economy, consumer advocacy and commentary on the financial news of the day has become deeply linked to the recession.  Because of this, we’ve written many articles on what we think our country’s leaders should do in order to fix the economy, as well as what we think about what they’re actually doing.  During that process, we’ve noticed that a number of major factors keep coming up to describe the problems with the state of our economy and our recovery.  We wanted, then, to take a moment to summarize the ten things we see as endemic to the economic problems we are facing and the steps we see as necessary to achieving their solutions.

10.  Level the Playing Field for American Workers:  We shouldn’t be penalizing U.S. companies for hiring from inside the country rather than outsourcing.  The payroll taxes that our government requires employers to pay for their American workers encourages companies to hire from outside of the United States.

Citibank's Gift for the Holidays

by Brian Johnson on December 21, 2009

giftCitibank is suspending foreclosures and evictions for the holiday season.  For 30 days, from December 18th through January 17th, Citibank is offering a reprieve to borrowers whose loans are owned by Citibank Corporation.  The company reports that it will help about 4,000 borrowers who are either scheduled to be evicted, or scheduled to receive notice of eviction during this period.

Citibank deserves to be commended for this act.  In the general state of the American economy as it stands right now, lending institutions are placed in a precarious position where they have to implement tough policies to keep their businesses afloat.  It seems that Americans are increasingly turning to lending institutions as a solution to this recession as well as a scapegoat for this nation’s economic troubles.  All too often we hear that either our economic crisis was the result of banks giving out bad loans (which it was), or that economic recovery depends on lenders lowering the minimum requirements for loan qualification (which it does not).

Did Washington Learn Anything About Bad Loans?

by Odysseas Papadimitriou on December 17, 2009

bad-loansOn December 14, 2009, President Obama met with CEOs of the largest banks to urge them to approve more loans, to lower interest rates, and to curb fees.  The meeting was obviously in response to Federal lawmakers’ feeling that, having bailed out the banks, the nation has a right to expect concessions from its financial institutions.  This feeling is fueled by the belief that America’s banks, having received federal funds, have since failed to adequately return to the business of loaning money.

To put this in perspective, we should remember that one of the large contributors to the current recession was the practice of giving out home loans to people whose incomes and credit histories did not justify those loans.  The assumption was, of course, that any loan was essentially a good investment since the value of the house was expected to appreciate astronomically.

More High-Yield Checking Options

by Lynn B. Johnson on December 14, 2009

High-Yield Checking AccountNow, here at Wallet Blog we’re no strangers to high-yield, interest-bearing checking accounts. Wrote about Focus Bank back in May and yes, their offer still stands. But how could I be content, knowing that I’ve only alerted you to one 4.51% checking account? Time to rectify that situation with a few other options.

For instance: Bank of the Sierra, based in my beloved California, also offers a 4.51% yield checking account. And you don’t have to be a millionaire to enjoy their top interest rate; you can open the account with only $50, and you’ll earn 4.51% APY on balances up to $25,000, so long as you meet the minimum qualifications for that statement cycle. (Qualifications include a minimum of 12 Sierra Check Card purchases per statement cycle, minimum of one direct deposit/automatic payment monthly, one Sierra BillPay payment per cycle, eStatements, and you must open the account line.) And, if that’s not enough, there are no monthly fees, you can earn up to $25 in ATM refunds each statement cycle, and there is a beautiful picture of Sequoia redwoods on their Sierra Reward Checking Web page. Click here to learn more and to open an account. Please note that the account is available nationwide, but you must be a U.S. resident or a U.S. resident alien to apply.

Free Samples -- Worth the Hassle?

by Lynn B. Johnson on December 12, 2009

free-samplesOK, the economy might be bouncing back but my wallet sure isn’t, so I went trolling on the Internet for some free samples. Call it cheapskate retail therapy. There are plenty of places where you can sign up for free stuff, but at what cost?

The first site I went to was  They list an appealing “fall sample pack” on their home page, along with other items that would be of interest to pretty much anyone who has pets, kids, or a pulse.

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